Editore"s Note
Tilting at Windmills

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May 5, 2009
By: Hilzoy

Conflict Of Interest

There is just no way that this ought to have been allowed:

"The Federal Reserve Bank of New York shaped Washington's response to the financial crisis late last year, which buoyed Goldman Sachs Group Inc. and other Wall Street firms. Goldman received speedy approval to become a bank holding company in September and a $10 billion capital injection soon after.

During that time, the New York Fed's chairman, Stephen Friedman, sat on Goldman's board and had a large holding in Goldman stock, which because of Goldman's new status as a bank holding company was a violation of Federal Reserve policy.

The New York Fed asked for a waiver, which, after about 2 1/2 months, the Fed granted. While it was weighing the request, Mr. Friedman bought 37,300 more Goldman shares in December. They've since risen $1.7 million in value. (...)

Mr. Friedman, who once ran Goldman, says none of these events involved any conflicts. He says his job as chairman of the New York Fed isn't a policy-making one, that he didn't consider his purchases of more Goldman shares to conflict with Fed policy, and bought shares because they were very cheap."

Whatever Mr. Friedman might think, having a director of the New York Fed serving on the board of Goldman Sachs, and owning 98,600 shares of Goldman Sachs, became an obvious conflict of interest once Goldman became a bank holding company. The New York Fed regulates banks and bank holding companies headquartered in New York, New Jersey, and Fairfield County, Connecticut, and enforces laws governing them, in addition to doing various other things that can affect their share prices. Goldman Sachs is a bank holding company headquartered in New York. I'm not sure how a conflict of interest could be more obvious than that.

In saying this, I do not mean to impugn Mr. Friedman's motives. I don't know Mr. Friedman. For all I know, he is a pillar of rectitude and a prince among men. That doesn't matter. For one thing, owning stock in a company you regulate can influence you without your awareness. In fact, it's hard to see how owning so much stock that a mere $1 change in the stock price means that your net worth goes up by nearly $100,000 could fail to affect your thinking, however hard you tried.

Moreover, even if you do manage to completely wall your decisions off from any such influence, conscious or unconscious, no one other than God can be certain of that. And if there's reason for people to wonder whether your decisions are influenced by your stock holdings, those decisions will be suspect.

The legitimacy of the Fed's decisions is very important. The Fed and its subordinate banks are unaccountable bodies with enormous powers. It matters both that their decisions be, and that they be believed to be, made without undue influence by politicians, bankers, or anyone else. It will not survive otherwise. The fact that it has not seemed to be independent either of politicians or of Wall Street recently is a very big problem. It needs to be dealt with directly. But the least we can expect is that its directors not make things worse by having large and obvious conflicts of interest.

Hilzoy 12:45 AM Permalink | Trackbacks | Comments (15)

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The "fix" is most definitely in. I think that, overall, Obama is doing a good job, but this Economic Recovery plan is a joke.

Posted by: paddy_boy on May 5, 2009 at 1:14 AM | PERMALINK

I don't know about the rest of you, but replacing Big Oil with Big Finance wasn't the "change" I voted for.

Time to throw the money changers out of the gvmt. Let's start with Summers, Geithner, and Emanuel.

Posted by: Disputo on May 5, 2009 at 1:18 AM | PERMALINK

Gaming the system, legally or illegally, has been going on ever since there was a system. During relatively stable times, the average schmo gets his/her crumbs and is satisfied that all is as it should be. What's interesting about these times is that we're getting a glimpse of how corrupt, immoral or unethical some people are -- so much so that they can't imagine that what they're doing is wrong.

Posted by: beep52 on May 5, 2009 at 1:21 AM | PERMALINK

Do you ever get the feeling it's going to take decades to unwind the financial history of the last two years?

I hardly know what to think. Was the "crisis" real and the TARP bailout the only thing that saved us from a total meltdown? Or was it the Bush administration's last sop to the financial giants? How bad was the credit crunch really? How have the rating agencies avoided their share of the blame?

What we need is a functioning press.

Posted by: Quaker in a Basement on May 5, 2009 at 1:49 AM | PERMALINK

...but replacing Big Oil with Big Finance... -beep52

I'm guessing the next scam should probably be in play about now.

What we need is a functioning press. - Quaker

Since that will take a while to gear up, if ever, I'd hold out for a really good group of undercover sleuts to publish a book, aka Watergate. Your right, this won't fit in a newspaper or blog.

Posted by: Kevin on May 5, 2009 at 2:45 AM | PERMALINK

Btw, for those interested in getter through WSJ's subscription wall to the full article, you can search for the article (using the link usually works) via Google. Like many sites, WSJ allows for free access for those coming from a Google search.

Eg, click here, and then click the first result to go to the article.

Posted by: Disputo on May 5, 2009 at 2:56 AM | PERMALINK

In saying this, I do not mean to impugn Mr. Friedman's motives. I don't know Mr. Friedman. For all I know, he is a pillar of rectitude and a prince among men.

Would you stop this? The reason the concept of conflict of interest exists is so that we can divide with a bright line who's playing above board and who's not without guessing at motives or divining self dealing in official actions.

Allowing a conflict of interest to fester is quite enough reason to impugn someone's motives and to topple him as a pillar of rectitude.

Posted by: Boronx on May 5, 2009 at 3:19 AM | PERMALINK

What the hell is wrong with this country? We have a AG who's dithering about prosecuting blatant crimes for political reasons, and this is seen as normal. We have conflict of interest in the Federal Reserve, and we don't want to impugn their integrity.

Ethical standards sure have slipped in the good ol' USA.

Posted by: Boronx on May 5, 2009 at 3:24 AM | PERMALINK

I don't know him either but if he didn't perceive the conflict of interest, he's a dimwit.

Posted by: BroD on May 5, 2009 at 5:49 AM | PERMALINK

" ... that he didn't consider his purchases of more Goldman shares to conflict with Fed policy, and bought shares because they were very cheap."

Isn't that what insider trading involves?

Posted by: Shag from Brookline on May 5, 2009 at 7:24 AM | PERMALINK

What Boronx said.

I will impugn his motives. Anybody who goes out and BUYS MORE SHARES while he is waiting for someone to make up their mind if it's ethical or not for him to own ANY shares is crooked.

And if he's not crooked, he is monumentally stupid and should be placed in a room with nice bright blocks to play with, not given hundreds of millions of dollars to spend.

Posted by: inkadu on May 5, 2009 at 9:08 AM | PERMALINK

The same Goldman Sachs that shorted gasoline to deliberately drive the price down before the 2006 elections so the Rethugs would not look so bad?

Posted by: SteveA on May 5, 2009 at 9:36 AM | PERMALINK

When will people ask the 'real question'?

Why does a cabal of private banks control the currency and monetary system of the United States?

Any rational/honest person would conclude that the natural result of such a system is the production of very wealthy bankers. [Which is exactly what we've got].

Posted by: Buford on May 5, 2009 at 9:45 AM | PERMALINK

it would be an astonishing story, if it weren't far too common.

the brilliant idea of outsourcing top management to europe sounds even better after reading about mr. friedman.


Posted by: karen marie on May 5, 2009 at 10:03 AM | PERMALINK

Why are we bothering to talk conflict of interest. As a fiduciary of the New York Federal Reserve Bank, Friedman had access to material nonpublic information that pretty clearly affected the price of a stock in which he was trading. At the very least, he disgorges every penny of his gains on both the original holding and the newly aquired shares. At the most, if his perception of the stock's cheapness can be shown to result even in part from his access to confidential government information (and yes, Fed deliberations are confidential) he takes up residence at Allenwood.

It's really very simple.

Posted by: paul on May 5, 2009 at 2:55 PM | PERMALINK



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